Katie Heath

Energy Law – Fall 2010

Natural Gas has been touted as the fuel to end both American dependence on foreign oil and need for environmentally destructive coal as viable energy sources. Viewed as a transition between traditional fossil fuels and cleaner renewables, natural gas has recently become a darling of the energy world as it has been discovered in abundance in American shale formations, rendering it both cheaper and more readily accessible than its coal and petroleum cousins. While extraction of natural gas from shale has become a lucrative opportunity for both gas companies and rural (typically less affluent) property owners, both affected communities and environmental activists alike have expressed concerns about the negative impacts on drilling to water resources, adjacent land, and human health. While the federal government typically has control over hazardous chemicals and activities that potentially endanger the environment, years of effective lobbying by the oil and gas industries and statutory loopholes have prevented federal regulators from overseeing what has been deemed an energy “goldrush”.

Part I of this paper will briefly explain the nature of hydraulic fracturing and its function in natural gas extraction, as well as potential consequences of its use. Parts II-VIII will examine the current exemptions under major federal environmental laws for materials and byproducts of the hydraulic fracturing process. Parts IX-X will focus on current attempts by the federal government and local authorities to either remove or circumvent hydraulic fracturing exemptions, and the paper will conclude with recommendations as to how both the federal and government should proceed to ensure protection for drilling communities and liability on the part of gas companies should negative consequences occur.

  1. Hydraulic Fracturing

Deep shale formations, such as the Marcellus Shale formation in the Northeast are home to one of one of the world’s largest natural gas deposits, perhaps enough to provide energy for the entire United States for a period of two years. To reach these deposits, tiny fractures can be created within the deep rock to release the methane for collection. In a process known as hydraulic fracturing or “fracking”, as it is routinely known, well drillers force high pressure fluids into a shale formation to crack the rock. Propping agents, such as sand or tiny glass beads are added to the fluid in order to “prop” the fractures open when the fluid pressure is decreased.

While the process has yielded massive stocks of methane from shale while creating a windfall for gas producers, property owners, environmental groups, and even gas corporation shareholders are concerned that hydraulic fracturing has negative environmental consequences. Much of the concern centers on gas migration into or fracturing fluid contamination of ground or surface water supplies. Although industry officials maintain that the wells are lined by steel, or separated from ground water by cement barriers, many argue that the various chemicals used in the process are entering the water supply, and companies are failing to erect barriers that are truly able to contain the “fracking fluids”.

One of the most pressing problems with fracking fluids is that gas companies have not been required, or have refused to disclose the contents or chemical composition of the fluids used in the process, maintaining that the makeup of the fluids are proprietary information. Energy in Depth, a group of oil and gas producers, published a list of materials contained in fracking fluid, which the industry claims are typically composed of household chemicals, although there is a fine print caveat that each drilling site uses different materials and combinations in its processes. While some of the chemicals are used as food additives, others are found in swimming pool cleaner, antifreeze, and caulking agents. Other chemicals alleged to be used in the hydraulic fracturing process are benzene, toluene, and xylene; chemicals that are heavily regulated when used in other industrial processes.

  1. Legal Environment Assistance Foundation, Inc. v. U.S. E.P.A.

Prior to 2005, the Safe Drinking Water Act (“SDWA”) required that the EPA promulgate regulations that set minimum requirements for state programs overseeing all underground injection activities. Underground injection wells were classified by use and function, and injection wells for the purpose of petroleum or gas extraction were identified in the Class II category. In 1982, the EPA approved the Alabama state UIC program, which failed to include natural gas wells that used the process of hydraulic fracturing for extraction. The gas wells were noticeably absent not only from class II designation, but from all other UIC classes as well.

In 1994, the Legal Environment Assistance Foundation (“LEAF”) petitioned the EPA requesting that they withdraw the approval given to the Alabama UIC program, as it specifically failed to regulate the hydraulic fracturing process, and this regulation was required by the SDWA. The EPA denied the petition, asserting that the SDWA required regulation of wells whose primary function was the placement of fluids underground, and the hydraulic fracturing extraction method did not fall under this requirement. LEAF petitioned the 11th circuit for review of the EPA’s denial as inconsistent with the language of the SDWA. In an important decision for the classification of shale and coal bed methane drilling, the court held that the plain language of the statute did in fact include hydraulic fracturing in the definition of underground injection, and therefore must be included in the minimum requirements for state UIC approval. The court granted the petition for review and remanded the case for further proceedings. A 2001 review by the eleventh circuit classified the natural gas wells as Class II for the purposes of regulation under the SDWC.

Prompted by industrial and political pressures, the EPA began a study in 1999 to determine the effect of coal bed methane fracking on subterranean sources of drinking water. The study concluded not only that hydraulic fracturing did not pose a contamination threat to groundwater, but that no further study on the method was required. Weston Wilson, a 31 year veteran of the EPA, disputed the findings, stating that EPA’s conclusions were unsupportable. In a letter to the EPA Inspector General and various members of Congress, Wilson requested whistleblower protection and promoted a belief that the report was generated by EPA officials who had numerous conflicts of interest. According to the EPA, however, the study received extensive peer review, and the EPA reserved the right to conduct further studies, and instituted a Memorandum of Agreement (2003) with gas companies to restrict the use of diesel fuel as an additive in the fracking process.

  1. Energy Policy Act of 2005

Concerned about the prospect of intensified regulations as a result of inclusion of hydraulic fracturing under the SDWC, and with the backing of the 2004 EPA report, the natural gas industry began lobbying for exclusion from the relevant provisions of the statute governing Underground Injection systems. In 2005, congress passed the Energy Policy Act for the stated purpose of “ensur[ing] jobs for our future with secure, affordable, and reliable energy.” Acquiescing to the demands of the gas lobby, the Act included several exemptions that nullified the 11th circuit’s ruling that the SDWA applied to hydraulic fracturing wells. Section 322 of the 2005 Act amended the SDWA to exclude the underground injection of natural gas for storage, and more importantly, “the underground injection of fluids or propping agents (other than diesel fuels) pursuant to hydraulic fracturing operations related to oil, gas, or geothermal production activities”. Known as the Halliburton Loophole, the exclusions were apparently inserted into the legislation at the behest of Vice President Dick Cheney, former Halliburton Chief Executive. The loophole effectively removed EPA power to regulate hydraulic fracturing, leaving oversight to state environmental agencies, and in many cases, oil and gas commissions.

  1. Clean Water Act

The Clean Water Act (“CWA”)contains specific provisions excluding hydraulic fracturing from regulation. 33 U.S.C § 1362 explains that the term “pollutant” does not include:

“water, gas, or other material which is injected into a well to facilitate production of oil or gas, or water derived in association with oil or gas production and disposed of in a well, if the well-used either to facilitate production or for disposal purposes is approved by authority of the State in which the well is located, and if such State determines that such injection or disposal will not result in the degradation of ground or surface water resources.”

The CWA sets effluent limitations for navigable waters of the United States by prohibiting all discharges of pollutants with some exceptions (as in the NPDES permitting system). As hydraulic fracturing fluids are no included within the term pollutant, they are excluded from regulation under the CWA.

The Ninth Circuit disagrees, however with a broad interpretation that excludes all of the byproducts of coal bed methane extraction. In Northern Plains Resource Council v. Fidelity Exploration and Development Co., the appellate court in a CWA citizen suit held that unaltered CBM groundwater should be considered industrial waste, and therefore a pollutant under the act, thereby removing it from the statutory oil and gas exemptions.

  1. Emergency Planning and Community Right to Know Act

The Emergency Planning and Community Right to Know Act (“EPRCA”), 42 U.S.C. § 11001, was created to encourage effective emergency planning among municipalities and require those who use certain hazardous chemicals to comply with community reporting requirements. While not prohibiting or restricting the use of particular chemicals, listed industries are required to make specific inventory reports of the chemicals and the hazards they present. As under most major environmental regimes, the oil and gas industries are exempt from the EPCRA reporting requirement. This exemption has further frustrated attempts by environmental groups and government officials to determine the fracking fluid composition at specific drilling sites.

  1. National Environmental Policy Act

The Energy Policy Act of 2005 not only exempted oil and gas drilling activities from the SDWA, but created under Section 390 extended certain categorical exclusions to the National Environmental Policy Act. The section directed that certain oil and gas drilling activities would “be subject to a rebuttable presumption that the use of a categorical exclusion under the National Environmental Policy Act of 1969 would apply if the activity is conducted pursuant to the Mineral Leasing for the purpose of exploration or development of oil or gas.” These categorical exclusions exempt drilling from required Environmental Impact Assessments that determine the potential impacts of various activities on different sectors of the total environment.

  1. RCRA

Certain wastes created from the oil and gas exploration and production processes are exempt from Subtitle C (hazardous wastes) of the Resource Conservation and Recovery Act. The initial passage of the statute exempted “drilling fluids, produced waters, and other wastes” pending a determination by the EPA administrator that regulation of these materials was warranted. In 1988, EPA issued the required determination stating that these materials should not be regulated under Subtitle C, but under the less stringent Subtitle D (nonhazardous waste) standard. This exemption guarantees that hydraulic fluids are not subject to the “cradle to grave” manifest system with which Subtitle C materials must comply.

  1. CERCLA

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), also known as the Superfund Legislation, gives broad authority to the federal government to identify releases or threatened releases of hazardous substances and compel responsible parties to participate in cleanup of the various sites. CERCLA authorizes both short term removal actions to respond to recent or threatened releases and remedial actions to reduce the hazards of serious prior releases. In these actions, CERCLA will anoint a Potentially Responsible Party or Parties (“PRP”) who becomes liable for the costs associated with cleanup.

While the introduction of hazardous materials in the past or present can subject the property owner or operator to CERCLA liability, oil and gas operators are yet again subject to an exemption that prevents both characterization of hydraulic fracturing materials as a hazardous release and characterization of the gas company as a PRP. 42 U.S.C. § 9601 sets out a definition for “federally permitted releases”, releases of hazardous material that are exempt from ex post enforcement under CERCLA. 9601(10)(I) adds to this list:

“any injection of fluids or other materials authorized under applicable State law (i) for the purpose of stimulating or treating wells for the production of crude oil, natural gas, or water, (ii) for the purpose of secondary, tertiary, or other enhanced recovery of crude oil or natural gas, or (iii) which are brought to the surface in conjunction with the production of crude oil or natural gas and which are reinjected.”

These exemptions fail to impose federal liability on drilling owners and operators who knowingly inject hazardous chemicals into fracking wells, as well as negligent operation which results in leaking or spillage. Although the extraction activities of oil and gas companies are excluded under CERCLA, States are not preempted from creating liability regimes that subject gas companies to strict regulations, and may regulate where they see a failure of the federal government to do so.

  1. FRAC Act and EPA Action

In response to reports that hydraulic fracturing was responsible for contamination of drinking water, potentially creating negative impacts for both surrounding environments and the health of both humans and livestock, twin bills were introduced in the House and Senate in 2009 that would remove the SDWA drilling exemptions that were added in the Energy Policy Act of 2005. The Fracturing Responsibility and Awareness of Chemicals, or “FRAC” Act would repeal the SDWA exclusions and require disclosure of the chemical composition of fracking fluids. The House bill was referred to the Subcommittee on Energy and the Environment, and the Senate Bill was referred to the Committee on Environment and Public Works. After debate, the fracking disclosure amendment was removed from an SDWA bill after debate by the committee.

In a 2010 budget report, the House Appropriation Conference Committee determined that further studies on the environmental impacts of hydraulic fracturing were needed. In response, the EPA began a hydraulic fracturing study to identify potential risks with the process. As part of this study, the EPA issued voluntary information requests to nine natural gas companies asking for detailed information regarding the hydraulic fracturing process, particularly the chemical composition of fracking fluids. Eight of the nine companies complied with the informational request. The ninth company, Halliburton, failed to respond, and in November 2010, EPA subpoenaed the company for the relevant information. While fighting the disclosure requirement, Halliburton simultaneously announced that it would release information about its fracking fluids on its website. Some of the chemicals disclosed are used as food additives, but others are present in household cleaners and pesticides.

Much of the industry opposition centers on the argument that state regulation of hydraulic fracturing is sufficient to protect community and environmental interests. A report issued in 2009, however, asserted that at that point at time, Alabama was the only state that had a specific regulatory regime affecting hydraulic fracturing, and it was court ordered as a result of the 1997 11th Circuit decision. Recently, however, several states and municipalities have taken action to prevent potential environmental degradation due to natural gas drilling. For example, Pittsburgh became the first city in Pennsylvania to ban gas drilling within the city limits. The City Council, by unanimous vote, approved the ban, citing environmental concerns stemming from the desires of gas companies to obtain leases on the profitable Marcellus Shale Formation. This ban came almost a month after Pennsylvania Governor Ed Rendell signed an order prohibiting further gas development on State forest land.

  1. Fiorentino v. Cabot Oil and Gas

On November 19, 2009, residents of Dimock Township filed suit in Federal District Court against Cabot Oil and Gas Corporation to recover damages resulting from the drilling and operation of gas wells within the Township. The plaintiffs claimed relief under the Pennsylvania Hazardous Sites Cleanup Act as well as other common law actions such as private nuisance and gross negligence. Defendants responded with a 12(b)(6) motion to dismiss on counts under the HSCA, strict liability, medical monitoring trust fund, and gross negligence. Dismissing the gross negligence claim as inconsistent with Pennsylvania law, the court refused to grant the motion on the other counts.